Realty Check

Shadow Inventory Dwarfs Loan Mods

Foreclosure Sign

I'm back on the foreclosure bandwagon again, especially after getting the Treasury's Home Affordable Modification Program status report this morning, and its glaring omission of any information as to how many borrowers are actually keeping up with the payments on their trial modifications. 

Good news that more than 650,000 borrowers have been put into trial mods, no news that we have no idea how successful those mods are now five months after the program really got cooking.

It's coming, that's what the folks at Treasury say. 

They also say that a lot of borrowers got extensions on the trial period in order to get paperwork together to move on to permanent modifications.  Insiders however tell me that a lot of that paperwork has to do with those so-called "stated-income" loans, where you just had to tell the lender what you make for a living, not actually prove it.  In order to move to a permanent mod, you have to prove it, so now we get to find out how many of those "liar loans" were just that.

But even more distressing was a report I received today from Lender Processing Services, which is a huge mortgage data aggregate. 

Foreclosure inventories continued their upward climb. The nation's September 2009 foreclosure rate stood at 3.12 percent - a month-over-month increase of 2.6 percent and a year-over-year increase of 88.9 percent. Among individual states, Florida posted the most troubling results with 10.4 percent of loans in foreclosure, and more than 22 percent of loans reported as non-current.

LPS' October Mortgage Monitor also cites large "shadow" foreclosure and REO inventories. The number of loans deteriorating further into delinquent status is now more than twice the number of foreclosure starts, indicating another major wave of troubled loans in an already clogged loan pipeline. Nearly one-third of foreclosures remain in pre-sale status after 12 months - twice as many as the year prior. The six-month average deterioration ratio has risen the past two months to 300 percent, showing that for every loan that improves in status, three more deteriorate further.

It's that second part I find really disturbing. 

I know the banks are holding off on putting all those REO properties on the market A) so they don't flood the place and push prices lower, B) so they don't have to sell the properties at the bottom of the market (if you actually believe this is the bottom).  So you've got all this excess inventory, and then you've got another problem, or two or three, eloquently laid out by mortgage guru Howard Glaser:

What I am most worried about is March and April of next year.  What happens to a housing market that seems like it is finding its footing at that point?  Because several things will happen simultaneously:  You've got the option ARM resets beginning to kick in, you have the home buyer tax credit expiring, maybe for  real that time, and you have the Federal Reserve maybe running out of money to buy mortgage-backed securities. If we add on top of that, banks beginning to release some of this inventory ,which they have been holding on to for a long time, those three items are potentially very destabilizing to the  marketplace.   So I'm concerned.  I think buckle your seatbelts for Spring of next year.

On now:

Questions?  Comments?